Trust in Financial Markets: Evidence from Reactions to Earnings News

Management Science forthcoming

54 Pages Posted: 12 Nov 2014 Last revised: 18 Mar 2022

See all articles by Chishen Wei

Chishen Wei

Hong Kong Polytechnic University - School of Accounting and Finance

Lei Zhang

City University of Hong Kong (CityU)

Date Written: March 1, 2022

Abstract

This paper studies the effect of trust on the perceived credibility of earnings news. Using earnings response coefficients, we find that firms located in low trust regions of the United States experience significantly lower stock price reactions to earnings news. Additional tests indicate that managers can counter balance investors’ dependence on trust by employing reputable auditors or signaling the quality of their earnings using dividends to improve the perceived credibility of their financial reports. Overall, our findings suggest that trust affects the pricing of earnings news in capital markets.

Keywords: Trust, earnings response coefficients, auditor quality, financial reporting

JEL Classification: G12, G14, G18, M41, M49, Z1

Suggested Citation

Wei, Chishen and Zhang, Lei, Trust in Financial Markets: Evidence from Reactions to Earnings News (March 1, 2022). Management Science forthcoming, Available at SSRN: https://ssrn.com/abstract=2469034 or http://dx.doi.org/10.2139/ssrn.2469034

Chishen Wei (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Lei Zhang

City University of Hong Kong (CityU) ( email )

College of Business
83 Tat Chee Avenue
Hong Kong
China

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